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Wednesday, February 20, 2013

What Impact Will BlackRock Suit Have on Fees?

News summary by MFWire's editors

Earlier this month, two pension plans filed a suit in Tennessee federal court against BlackRock [profile] over the issue of securities lending.

What impact could this suit have on fund fees?

According to MarketWatch, "investor lawsuits typically face long odds in court, they add that this case may help clarify a controversial area of the ETF business, and perhaps spur changes that could help investors. For example, investor lawsuits in the 401(k) arena have recently led to greater disclosure and lower prices."

MarketWatch explains that the practice is question is called securities lending, in mutual funds and ETFs pay agents to help them lend out shares in their portfolios to Wall Street traders and earn interest. This can boost profits, according to MarketWatch, generating about $10 billion in annual revenue for mutual funds and other investment pools, estimates research firm Markit—as well as investor returns.

However, in the lawsuit filed last month in a U.S. District Court in Tennessee, the two pension funds argues not enough of that extra money is making it back into the hands of shareholders. BlackRock says it remits about two-thirds of the revenue it earns from securities lending to investors, while the rest goes to cover costs and boost the bottom line. The lawsuit—brought by the Laborers Local 265 and Pipefitters Local No. 572—says that is well below rivals like Vanguard, which passes all share-lending profits on to fund holders. The suit charges BlackRock with “self-dealing.”

MarketWatch quotes William Birdthistle, a law professor at the Illinois Institute of Technology who specializes in investment companies, as saying “You want sunlight."

“Lawsuits like this can provide an investor education,” Birdthistle tells MarketWatch.

Read more on this issue in MarketWatch.  

Edited by: Tommy Fernandez


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